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Barack Obama has named Gary Gensler, a former Treasury official under President Bill Clinton, to take over the Commodity Futures Trading Commission (CFTC).

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New York Times:

Mr. Obama has vowed to reverse the deregulatory stance of the Bush administration and overhaul the entire system of financial supervision. Though Mr. Obama’s team has not mapped a specific plan, advisers on his transition team said reining in derivatives would be one of the biggest and most complicated parts of that effort.

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Wall Street Journal:

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Is deregulation to blame? – by Reason Magazine

2) The Commodity Futures Modernization Act of 2000 guaranteed that high-risk tools such as credit default swaps remained unregulated, opting instead to encourage a “self-regulation” that neverhappened.

In late September, Securities and Exchange Commission (SEC) Chairman Christopher Cox estimated the worldwide market in credit default swaps —pieces of paper insuring against the default of various financial instruments, especially mortgage securities— at $58 trillion, compared with $600 billion in the first half of 2001. This is a notional value- only a small fraction of that amount has actually changed hands in the market. But the astounding growth of these instruments contributed to the over-leveraging of nearly all financial institutions.

In the late 1990s, the fight over these and other exotic new derivatives pitted a committed regulator named Brooksley E. Born, head of the Commodity Futures Trading Commission, against the powerhouse triumvirate of Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin, and Securities and Exchange Commission Chairman Arthur Levitt Jr. Unsurprisingly, Greenspan, Rubin, and Levitt won. The result was the Commodity Futures Modernization Act of 2000, which gave the SEC only limited anti-fraud oversight of swaps and otherwise relied on industry self-regulation.The Washington Post has closely chronicled the clash, concluding that “derivatives did not trigger what has erupted into the biggest economic crisis since the Great Depression. But their proliferation, and the uncertainty about their real values, accelerated the recent collapses of the nation’s venerable investment houses and magnified the panic that has since crippled the global financial system.” In other words: The absence of a regulation didn’t cause the crisis, but it may have exacerbated it.

Part of the problem was a technicality. Instruments such as credit default swaps aren’t quite the same thing as futures, and therefore do not fall under the Commodity Commission’s purview. But the real issue was that Greenspan, Rubin, and Levitt were concerned that the sight of important figures in the financial world publicly warring over the legality and appropriate uses of the derivatives could itself create dangerous instability. The 2000 law left clearing-house and insurance roles to self-regulation. Without a clearinghouse, the market for credit default swaps was opaque, and no one ever really knew how extensive or how worthless the derivatives were.

In congressional testimony on October 23, Greenspan seems to have admitted error: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform. But Greenspan still wasn’t convinced that regulation is the solution: “Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he said at the same event. “Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”

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Previously: New SEC Chief

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BACKGROUND INFO:

– CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts&#8230- notably how they define &#8220-event markets&#8221-, how they are going to extend their &#8220-exemption&#8221- to other IEM-like prediction exchanges, and how they framed their questions to the public.

– American Enterprise Institute’s proposals to legalize the real-money prediction markets in the United States of America

Join our group at LinkedIn to have your “Prediction Markets” badge on your profile. It’s ‘chic’. (“Groups” info should be set as “visible”, in your profile options.) We are 63 this early Saturday morning —keeps growing.

If you have been using PayPal to fund your InTrade, TradeSports or BetFair account, please, check that horror story.

48 hours after the launch of the “Prediction Markets” group at LinkedIn, we have already 52 members —both prediction market luminaries and simple people (trading the event derivatives or collecting the market-generated probabilities).

A futures contract is an agreement between a buyer and a seller. It obligates the buyer to take possession of a specified amount of a given commodity or financial instrument and to do so by a given date. Likewise, it obligates the seller to deliver (sell) a specified amount of a given commodity or financial instrument by a given date. The specified date is the expiration date of the futures contract. Futures contracts lock in current prices, that is, the prevailing prices at the time the contracts were bought or sold. This protects both the buyer and seller against the risk of price change between the moment of the contract transaction and the time of delivery (the expiration date). Futures contracts can be bought or sold at any time by anyone and they can change hands any number of times before expiration.

Related to the expiration date is the first notice date. This is the date after which the contract holder may be required to take possession (if long) or to deliver (if short) the specified quantity of the underlying commodity. After first notice date, those who are long futures contracts can demand delivery and those who are short may be required to deliver. Futures speculators who want to maintain a position past first notice date &#8220-roll over&#8221- their contracts to others that have later expiration dates.

Futures contracts may be used in several ways. For example, producers of commodities use them to hedge risks. A grain producer may have 10,000 bushels of corn that will be ready on a given date, and he or she wants to lock in specific sales price on that date. Locking in the price with a futures contract avoids the risk of vagaries in the corn market. Consequently, the use of futures allows the producer to budget and plan, knowing what price to expect on delivery. The way the producer ensures the price is by selling futures contracts. The buyer of futures contract is then obligated to take delivery of the corn on a given date, at the specified price.

For the speculator [or] day trader, futures contracts are used purely as trading instruments. They enable profits to be made from correctly anticipated price changes. For example, a trader expecting stocks to rise can profit from the anticipated move by going long an S&amp-P 500 or E-Mini contract. To avoid acquiring the commodity and then having to turn around and sell it, speculators generally do not hold futures contracts past expiration or first notice date.

Today, futures trading on modern exchanges is highly standardized. Future contracts have fixed expiration dates and contract sizes, and each contract is identified by a unique symbol. Specifying a futures contract, such as when requesting a quote or placing an order, requires knowledge of the month in which the contract terminates or expires, and the root symbol used to identify the contract series.